When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4 percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates that
A) the cross-price elasticity between tortilla chips and dips is 0.8, so the two are substitutes.
B) the cross-price elasticity between tortilla chips and dips is -0.4, so the two are complements.
C) the cross-price elasticity between tortilla chips and dips is -0.8, so the two are complements.
D) the cross-price elasticity between tortilla chips and dips is 0.4, so the two are substitutes.

Question

Quizplus · Accepted Answer

The 10% increase in price of tortilla chips resulted in 4% decrease in quantity sold. This implies that the price elasticity of demand for tortilla chips is -0.4 (decrease in Qd / increase in price). Additionally, the 8% decrease in sale of dips indicates that the two goods are complements, meaning that an increase in the price of tortilla chips (a complement of dips) leads to a decrease in the demand for dips. Hence, the cross-price elasticity of demand between tortilla chips and dips is negative. Using the formula for cross-price elasticity (percentage change in quantity demanded of one good divided by percentage change in price of the other good), we can solve for the value of the cross-price elasticity, which turns out to be -0.8 (-8% / 10%). Therefore, the correct answer is C.

When the Price of Tortilla Chips Rose by 10 Percent